What start-ups need to know about hiring talent

Why would anyone with a mortgage and family leave a stable job at a big company to go work for a start-up that has a less than 1 percent chance of surviving for more than a few years? It sounds like a wildly impractical idea -- yet very talented people make that seemingly irrational choice.

A San Francisco-based venture that allows all participants in big construction projects to get access to the latest versions of key documents like blueprints was able to persuade some impressive talent to give up cushy big-company salaries for a chance to work long hours for lower pay and a tiny chance at the big time.

And the Silicon Valley Start-up Common has played a key role in getting that venture off the ground.In a December 18 interview, PlanGrid CEO, Ryan Sutton-Gee, explained that the Silicon Valley Start-up Common helped him persuade talented people to quit their jobs at big companies to join PlanGrid.

A big reason is the Silicon Valley Start-up Common's culture. Mr. Sutton-Gee is particularly conscious of how perceived risk varies depending on the culture. For example, his wife is from Japan and his visits there have persuaded him that its citizens are generally "really risk adverse to doing startups."

The preferred career option there is "government worker," according to Mr. Sutton-Gee. He describes that choice in Japan as "the signal [of what is] the safe, smart, socially acceptable thing to do."

But Mr. Sutton-Gee has seen that the Silicon Valley Start-up Common has very different values -- making it seem normal for people to start companies as a way to solve problems. This attitude shapes his belief that people should "try to escape whatever the perceived risk thing is for whatever culture you’re in and try to just do the math. [If they do], I think they'll see that it’s actually a really great decision to try to start your own business."

But my math -- based on assumptions that might not agree with Sutton-Gee's -- suggests that the expected value of PlanGrid's cofounders big company salaries is greater than the value of their share of PlanGrid. It all depends on whether PlanGrid can boost its worth to the proverbial $1 billion.

If prior to joining PlanGrid, those co-founders each earned $80,000 a year and had the prospect of boosting that figure by an average of 5 percent a year for the next 40 years; the value of that career in current dollars would total $1.4 million -- assuming a 5 percent discount rate.

Somehow Mr. Sutton-Gee persuaded three co-founders to give that up for a chance to get paid what I assume is less than they made at their big company jobs in a start-up with a very small chance of becoming a $1 billion company by 2017. Assuming that each co-founder got 10 percent of the company, that $100 million stake would be worth $78 million in 2012 dollars.

But the chances of that happening would have to be relatively high -- 1.8 percent to make Mr. Sutton-Gee's co-founders indifferent between staying in their cushy job and becoming co-founders. According to Mike Maples, Jr. of Floodgate Capital, a mere 1 in 10,000 start-ups become this special -- meaning that the highest probability of PlanGrid becoming worth $1 billion would be a fraction of that 1.8 percent -- specifically, 0.01 percent.

This analysis is a bit extreme because there's a good chance that a start-ups' co-founders can always seek another regular job if their start-up fails or roll the dice again. But that does not absolve an entrepreneur from needing to make a great sales pitch to attract talented co-founders.

Y Combinator -- a venture accelerator that accepts what its founder Paul Graham thinks are the most promising start-ups into a program that gives the team three months to build a prototype and find a customer -- helped Mr. Sutton-Gee make that pitch.

As he explained, "It’s pretty risky to jump and do a prototype for six months with the possibility that you have nothing, right? So the biggest risk is me not being a software engineer and then seeing software people that they’re willing to quit their cushy jobs that this guy may or may not know anything. It’s an unbelievable thing to ask, even in Silicon Valley."

According to Mr. Sutton-Gee that's because "instead, what you’re asking is, 'Hey, why don’t we apply to Y Combinator?' We’ll build this prototype and we’ll apply to them. And if we get it, then we’ll all quit everything and do it.' And that’s much, much less risk to get someone to commit to. And I think that made it an order of magnitude easier for us to get started."

Mr. Sutton-Gee and his co-founder Tracy Young also decided that given the $1 trillion size of the construction industry and the amount that construction sites spend on paper, the market opportunity of $3 billion -- assuming PlanGrid charges less than $30 per month spent on paper by the construction industry -- would be large enough to support their venture.

But Y Combinator also supplied PlanGrid with mentors and peer pressure. The mentors helped PlanGrid avoid "doing stupid things" like giving its product a name that would not appeal to customers or launching a product too late without customer feedback. The mentors also helped PlanGrid find customers and hire executives and sales people.Moreover, working with other start-ups in close quarters pushed PlanGrid to keep up thanks to peer pressure and their internal drive.

PlanGrid offers a simple lesson to start-up founders: If you can paint a realistic picture that your venture can become a big company, you can lure very talented people away from a high-salaried job with a big company.PlanGrid’s approach provides a model of how to do that.